Exhibit 19.11
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay semiannual interest. Bond X has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8% per year, and a face value of $1000. Bond Y has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8.5% per year, and a face value of $1000.
-Refer to Exhibit 19.11.Calculate the percentage gain per invested dollar for Bond X assuming a one year horizon,and a reinvestment rate of 8% per year.

Question

Quizplus · Accepted Answer

The purchase price is = $901.04 =
 $35 \left( \frac { 1 - \frac { 1 } { 1.04 ^ { 40 } } } { .04 } \right) + \frac { 1000 } { 1.04 ^ { 40 } }$ 
The selling price after 1 year is = $903.16 =
 $35 \left( \frac { 1 - \frac { 1 } { 1.04 ^ { 38 } } } { .04 } \right) + \frac { 1000 } { 1.04 ^ { 38 } }$ 
The terminal value of cash flows at year 1 = $974.56 =
 $35 \left( \frac { 1.04 ^ { 2 } - 1 } { .04 } \right) + 903.16$ 
The percentage gain per invested dollar = 8.16% =
 $\left( \frac { 974.56 } { 901.04 } \right) - 1$

Exhibit 19.11 Use the Information Below for the Following Problem(S)